What to do about Microsoft?

Microsoft’s dominance of the computer industry has created a new economic reality where competition dares not tread. The company’s strengthening monopoly raises concern in both the United States and Europe regarding the future of digital communications.

by James Love and
Ralph Nader

is the world’s most important information services company. This
is not a result of its size - many firms are larger in gross revenue
(1). Nor is it a consequence of its products - there are many firms
that are more innovative. Microsoft is the most important information
services company simply because it controls the software foundations
for nearly all programs that run on personal computers today, and
because Microsoft is using this control to launch a dizzying assault
on mass market software applications, information services,
electronic commerce and publishing ventures.

The success story of its founder, Bill Gates (2), should not
obscure the reasons for the company’s dizzy rise. Today, experts
estimate that Microsoft controls about 90% of the market for the
operating system software (OS) which is used to run personal
computers. Moreover, Microsoft controls nearly the same 90% market
share for popular applications such as Word Processors, spreadsheets,
presentation graphic programs and relational databases - the
components of the “suite” of office applications that it bundles to
consumers.

But Microsoft has rarely been the innovator in markets. It
purchased MS-DOS, the PC’s first operating system, from another firm.
The graphic user interface Windows was based on the Apple Macintosh,
which Apple itself had imitated from an early computer by Xerox.
Excel, the Microsoft spreadsheet, is an imitation of Lotus 123, which
was in turn an imitation of VisiCalc.

Microsoft Word was introduced into the market long after several
other popular word processors. Microsoft’s Power Point imitated
programs such as Harvard Graphics or Freelance, and Microsoft used
acquisitions to buy itself into the relational database market, where
it was a late entrant.

While Microsoft was typically late for the dance, it rarely left
empty-handed. Today, Microsoft so completely dominates each of these
markets that few venture capitalists would even consider funding new
programs that would seek to dislodge it. Microsoft is not only
successful, it seems unbeatable in the PC applications markets.

Microsoft has succeeded in part because its management was willing
to spend enormous resources to improve its products, which were often
poor performers in the early releases, and also because it excels in
marketing its products.

But Microsoft has also engaged in practices which are often
described as predatory or anti-competitive, such as the continual
manipulation of the proprietary operating system to undermine rival’s
products, selective dissemination of information regarding the
operating system’s current and future functionality, the bundling of
weak products with essential products, pre-announcements of
non-existent products to discourage consumer purchases of rival goods
(sometimes referred to as “vaporware”), raids on key company staff
from other companies.

No to mention an advertising strike force which targets
specialised media (3) and predatory pricing of products to deprive
rivals of revenue. Microsoft’s power and its reputation for ruthless
anticompetitive actions has demoralised most of its rivals.

Not in the public interest

Now, after Microsoft has defeated a large number of creative and
innovative firms to reign supreme in the entire range of desktop
applications, it is turning its attention to the Internet - another
area where Microsoft made a late entrance.

Bill Gates’ empire is seeking to “own” the interface and operating
system which connects computer users to the Internet. It is doing
this by spending mega dollars on the development of the Microsoft
Internet Explorer (MSIE), which it distributes as a free product (now
included in the Microsoft basic operating system) in competition with
Netscape, the only firm which is still trying to compete with
Microsoft in the Internet browser market. If Microsoft succeeds in
driving Netscape and other companies from this market, it will be in
a position to use its monopoly to control future standards which are
essential for Internet-based publishing, information services and
electronic commerce, and Microsoft is expected to continue its
efforts to transform the Internet into a much more closed and
proprietary system - owned by Microsoft.

Microsoft is also engaged in a battle with Sun Microsystems over
standard setting for Java, a computer language which was invented by
Sun. Sun is one of the few companies that are still willing to openly
challenge Microsoft on issues central to Microsoft’s core business.
Today, programmers face the costly and difficult problem of writing
separate programs for different types of computers and software
operating systems. Often programmers elect to only write programs
that run on the 90% of personal computers that use Microsoft
operating systems. Sun designed Java as a “Write Once Run Anywhere”
system. A program written in Java is supposed to run on any computer,
regardless of the hardware or software. This undermines Bill Gates’
monopoly power.

Microsoft is attempting to neutralise Java through the same
“embrace and extend” strategy which it is using to corrupt the open
standards which have been traditionally used for Internet publishing.
Microsoft adds features to its version of Java which will only work
with the Microsoft operating system. If enough programmers exploit
these features, their Java programs will only work on programs
running Microsoft’s software. Dan Nachbar, a high tech investment
advisor, says this is to embrace and extend like an anaconda.

Is Microsoft’s monopoly in the public interest? Some say Microsoft
is a blessing because it has given us inexpensive software and made
it easier for consumers to share and exchange documents and data.
However, we should recall that low-priced consumer software was
pioneered by Borland and other software companies, and that the
Internet has vastly enhanced the sharing of data on a system that was
designed to be open and competitive.

But in every field where Microsoft has gained overwhelming
dominance, there has been a dramatic decline in innovation. Venture
capital has dried up for software products that compete head to head
with Microsoft, and venture capital is drying up for products that
may in the future become targets of Microsoft. The company will soon
be in a position to close the open system upon which the Internet has
flourished as a platform for new innovation. If Microsoft monopolises
the user interface for the Internet, it can bias the selection of
content and services, which will create new opportunities for
Microsoft to partner with various industry sectors, while rendering
Internet commerce less competitive, thus harming consumers. Apart
from economic considerations, we believe society is harmed by
excessive concentrations of power

Society is not powerless to deal with this new digital age
monopoly. Consumers, software developers and governments can take
concrete actions that will restrain Microsoft’s monopoly power and
enhance competition. Government action is clearly appropriate.
Anti-trust authorities in the European Union and the United States
need to act now to prevent Microsoft from extending its current
monopoly on the operating system for desktop computers to the browser
platform for Internet services.

In addition, government procurement authorities should allocate
part of computer budgets for systems which use non-Microsoft
software, to enhance competition. It should be forced to separate its
operating system from its applications, and anti-trust authorities
should review and constrain Microsoft’s decisions regarding building
of applications with its operating system, and monitor predatory
practices. Microsoft should be enjoined from mergers and acquisitions
which lead to too much power in determining standards for Internet
multimedia and electronic commerce

The United States has requested courts to sanction some of
Microsoft’s practices. It is now the turn of Europeans to conduct
their own reviews of its practices. The future of digital
communications in now at stake.

* Ralph Nader is a consumer advocate in the United
States. James Love is an economist, at the Center for Study of
Responsive Law’s Consumer Project on Technology, Washington
(http://www.cptech.org).